Question

The green giant has a 8 percent profit margin and a 67 percent dividend payout ratio. the total asset turnover is 1.3 times and the equity multiplier is 1.6 times. what is the sustainable rate of growth?

Answer 1

The sustainable rate of growth for the Green Giant is calculated using the formula SGR = ROE × (1 - dividend payout ratio). With a profit margin of 8%, a dividend payout ratio of 67%, a total asset turnover of 1.3 times, and an equity multiplier of 1.6 times, the sustainable growth rate is approximately 5.49%.

Step-by-step explanation:

To find the sustainable rate of growth for the Green Giant, we need to apply the formula for calculating this rate, which is based on the company's profit margin, dividend payout ratio, total asset turnover, and equity multiplier.

The formula for the sustainable growth rate (SGR) is:

SGR = ROE × (1 - dividend payout ratio)

Where Return on Equity (ROE) can be calculated as:

ROE = Profit Margin × Total Asset Turnover × Equity Multiplier

Given:

• Profit Margin: 8%
• Dividend Payout Ratio: 67%
• Total Asset Turnover: 1.3 times
• Equity Multiplier: 1.6 times

First, we calculate the ROE:

ROE = 0.08 × 1.3 × 1.6 = 0.1664 or 16.64%

Then, we calculate the SGR:

SGR = 0.1664 × (1 - 0.67) = 0.1664 × 0.33 = 0.054912 or 5.4912%

Therefore, the sustainable growth rate for the Green Giant is approximately 5.49%.

Answer 2

Profit margin of green giant = 8% = 0.08
Dividend payout ratio = 67% = 0.67
Total turnover = 1.3 times
Equality multiplier = 1.6 times
First calculate the return of equity = profit margin x turnover x equality
multiplier
Return of Equity = 0.08 x 1.3 x 1.6 = 0.1664
Now the sustainable rate of growth = Return of Equity x (1 - Dividend payout ratio)
Sustainable rate = 0.1664 x (1 - 0.67) = 0.1664 x 0.33 = 0.055
Sustainable rate of growth = 5.5%